Grantee Research Project Results
Final Report: Testing the Potential to Implement Collective Enforcement Agreements in Point-Nonpoint Source Pollution Trading and Voluntary Incentive Agreements
EPA Grant Number: R828627Title: Testing the Potential to Implement Collective Enforcement Agreements in Point-Nonpoint Source Pollution Trading and Voluntary Incentive Agreements
Investigators: Sohngen, Brent , Randall, Alan
Institution: The Ohio State University
EPA Project Officer: Chung, Serena
Project Period: September 1, 2000 through August 30, 2002 (Extended to June 30, 2004)
Project Amount: $200,291
RFA: Market Mechanisms and Incentives for Environmental Management (2000) RFA Text | Recipients Lists
Research Category: Environmental Justice
Objective:
The goal of this project was to test whether collective enforcement mechanisms could be used to achieve water quality improvement from groups of farmers within a single watershed. Collective enforcement arrangements hold groups of farmers responsible for reductions in pollution and allow the group to determine collectively how to allocate payments for pollution abatement to individuals. The basic notion is that farmers are more suited to understanding how their own land management practices and those of their neighbors affect pollution outputs than distant entities. Cost savings arise because collective arrangements focus on performance instead of specific abatement technology, and flexibility in abatement technology choice may promote further innovation. This research project tested whether collective incentives could encourage farmers to work in teams to cost-effectively reduce their pollution emissions within a watershed. The collective enforcement mechanisms developed here are more realistic than others suggested in the economic literature. Further, we tested the mechanisms in various watersheds and will eventually implement them by working with a watershed group to secure funds for implementation.
The objectives of this research project were to:
- develop and refine a collective enforcement mechanism that can be used in the field to substitute for traditional application of technology standards (i.e., BMPs) in voluntary incentive programs;
- test the collective enforcement mechanism among groups of farmers in watersheds and further refine the mechanism based on the results of the test;
- work with stakeholders in a watershed to implement the resulting collective enforcement mechanism;
- and develop empirical watershed models of point and nonpoint source trading to estimate the economic efficiency of trading systems that rely on trading ratios, and systems that rely on collective enforcement mechanisms.
During the course of the research, Objective 4 was altered to focus on experimenting with the group contract mechanism. The researchers determined that a large amount of information was available from existing research reports to understand the relative costs of alternative treatment technologies, but little information was known about the properties of the proposed contracts in practice. We determined that more benefit would be obtained from assessing the proposed contracts through experimental methods. We developed a program so that the contracts could be tested repeatedly by farmers or students in a mobile computer lab. The computer experiments have been used so far with several groups of students on campus and several groups of farmers at a large farm meeting.
Summary/Accomplishments (Outputs/Outcomes):
Methods
This project employs both theoretical research into mechanism design and quantitative and qualitative research using focus groups and experimental economics to test the theoretical models in practice. The theoretical studies explore:
- what group contracts would look like if farmers have perfect information about their neighbors abatement cost functions;
- how information about costs of abatement can be revealed through bidding mechanisms;
- and how peer pressure and other non-pecuniary devices could be used to avoid the moral hazard problems associated with group liability contracts.
The qualitative focus group research explores farmer information levels regarding abatement cost functions, their willingness to bid into contracts that involve joint liability with their neighbors, and the impediments to developing group contracts that could be used in practical applications where real conservation cost-share dollars are at stake. Experimental economics have been used to test different facets of the proposed contracts with farmers and students.
Research Results
This research has provided several insights into potential contracts that could be designed for nonpoint source pollution abatement in agriculture. The results in Pushkarskaya (2003) establish the basis for group performance contracts within small agricultural watersheds. That study examines how group contracts can be written and enforced within small watersheds where farmers have information about their neighbors’ abatement costs. The results from a followup experimental project that used farmers as subjects suggest that farmers are more concerned with personal relationships within an abatement group than with the uncertainty associated with the nonpoint nature of the pollution. Taylor (2003) developed a bidding procedure for individual farmers to enter into a group contract to set their payment shares. The results of that project show how a nonlinear contract (i.e., all-or-nothing payment contingent on group success) can provide sufficient incentives for individuals to meet their pollution abatement obligations. In addition, the contract proposed by Taylor showed that farmers can develop efficient bidding strategies to control for uncertainty caused by weather or other random shocks. Taylor, et al. (2004) examined this context in an experimental setting and provided initial data supporting the bidding process as an efficient mechanism to allocate abatement shares and to allow farmers to control for uncertainty. This study also showed that the nonlinear contract as an efficient mechanism to reduce moral hazard.
Isik (2004) examines the role of peer pressure and whether it can provide sufficient incentive to ensure performance. In particular, he examined a contract that incorporates a fixed initial payment followed by a bonus payment made when the group contract obligations are met. His results show that peer pressure is necessary to ensure that the target is met, suggesting that if the participation constraint is sufficiently strong (i.e., farmers will only participate for some guaranteed positive payout), then peer pressure is necessary to ensure that the group meets the pollution abatement target.
In addition to the research project above that examines the theoretical basis for group performance contracts, several focus groups were conducted to help develop a working prototype of a group contract that could be used for nonpoint source pollution abatement. Specifically, we were interested in developing a contract that could be used by point sources to purchase nonpoint source pollution abatement upstream.
The focus groups addressed the following general questions:
- What do farmers think about water quality in their region, and do they know what practices can be used to reduce runoff?
- Can farmers calculate the information necessary to enter into a performance-based contract, (i.e. nutrient reductions and costs)?
- Would farmers cooperate to reduce loadings in their watershed?
Four focus groups were conducted with 37 total farm participants. Farmers were recruited from specific watershed areas using lists obtained from several farm magazines in the state. The participants generally were indicative of the types of farmers who control most (more than 75%) of farmland in Ohio. The following summarize the general results related to a potential group performance contract:
- Farmers already are familiar with a wide variety of practices that could reduce nutrient outflows from their farms. They routinely generated long lists of potential practices that could be used.
- Farmers are very comfortable estimating their costs for installing or undertaking different practices. They have less familiarity and confidence with estimating the impact of those practices upon water quality downstream.
- Farmers are best suited to choose which practices will help meet the target. A contract that allowed flexibility (i.e., did not dictate a specific nutrient reduction practice to be used) would be more effective and cost efficient.
- Farmers recognized that they could make money on pollution trading with group performance if everyone cooperated and did what they said they were going to do, but they would lose money if they did not cooperate.
- Farmers generally believe that, as a group, they are cooperative and true to their word. They did not think initially that shirking would be a problem, although several instances of shirking were noted in scenarios we conducted with the participants. The main concern was that farmers might have to “tell-on” their neighbors, although this would be less of a concern if they were able to keep the information within the group rather than disclose it to officials from government agencies.
- There was general concern about the potential $0 payout.
Suggestions from the participants:
- Realistic contracts must have a default payment greater than zero and have only part of the payment tied to performance, with a fixed initial amount for getting started.
- Make the program multi-year (i.e., at least 5 years), with pay-outs occurring each year the target is met.
- In determining who should be in charge of the monitoring, some participants thought that the farm groups should take an active interest in monitoring the water quality themselves.
Conclusions:
We conclude from the results that group contracts potentially can be an effective method to reduce agricultural pollution. The theoretical research has informed our knowledge about the importance of information, uncertainty, and peer pressure in the design of group contracts. First, according to the results in Pushkarskaya (2003), if farmers have information about their neighbors’ farming practices and abatement costs, then group performance contracts can be efficient. An important step in developing group contracts will be to continue improving farmers’ knowledge about their costs of abating pollution and reducing downstream effects. Second, according to Taylor (2003), bidding can be an efficient method to allocate pollution abatement shares within a small watershed, and farmers can use bidding on price and quantity to effectively control for uncertainty caused by random shocks (with known variance). Finally, according to Isik (2004), if fixed payments are provided to farmers, as is the case with nearly all current pollution abatement contracts with farmers, then it will be difficult to reduce pollution, and it will be even more difficult to ensure performance. Peer pressure, however, can reduce moral hazard, particularly if fixed and bonus payments are combined.
The focus groups suggest that farmers were receptive to the idea of engaging in group contracts. They had several substantive suggestions for contract design that were incorporated into the theoretical studies above (fixed payments are important to ensure participation, peer pressure can provide motivation to meet the target, the need to address weather uncertainty, etc.). As a result of the theoretical studies and the focus groups, we obtained funds to attempt to implement a group contract in practice. Currently, we are undertaking this extension and are in the first year of monitoring baseline water quality in two small watersheds in Ohio.
Tangible Results
- Three Ph.D. dissertations completed and papers for each of the theses are in process.
- Met five times with an advisory group consisting of agency personnel from Ohio U.S. Environmental Protection Agency (EPA), Ohio Department of Natural Resources, the U.S. Department of Agriculture Natural Resource Conservation Service, and the Ohio Farm Bureau to find ways to develop the focus groups, and determine which regions in Ohio to target for focus groups and implement the performance-based concepts developed through the research.
- Completed five focus groups with farmers in different Ohio watersheds.
- Developed two software programs to test the potential contracts in practice.
- Completed six experimental sessions with farmers and students.
- Presented several papers at national or international conferences.
- Presented the results to numerous watershed groups in Ohio (Stillwater River Watershed Group, Little Miami River Watershed Group, Wabash Watershed Initiative, Ottawa River Watershed Group).
- Presented the results to Surface Water Division of the Ohio EPA.
- Worked with the Wabash River Watershed Group to submit a proposal to implement
performance-based contracts with cost-share programs.
- The grant was submitted to the Ohio EPA Section 319 grant authority, but was not funded.
- Worked with the Miami Conservancy District to write a grant to the
EPA Watershed Initiative for the Great Miami River Basin.
- The Great Miami project was 1 of 20 selected from around the country. The performance-based concepts developed in this proposal will be implemented through this project in the Stillwater River Watershed.
- This grant will provide $352,000 for implementation of the proposed contracts with farmers in two selected small watersheds. The period of implementation will be 2003-2007.
- Currently, progress on this grant includes 9 months of water quality baseline monitoring data for two small (< 1000 acre) watersheds, several meetings with the farmers in those watersheds, and a continuing discussion about pollution abatement. It is anticipated that farmers in one watershed will be under contract by April 2005, and the first commitment period will commence in April 2005, when we have 1 full year of baseline monitoring data (April 2004 - March 2005).
Journal Articles on this Report : 1 Displayed | Download in RIS Format
Other project views: | All 17 publications | 1 publications in selected types | All 1 journal articles |
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Type | Citation | ||
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Taylor MA, Sohngen BL, Randall A, Pushkarskaya H. Group contracts for voluntary nonpoint source pollution reductions: evidence from experimental auctions. American Journal of Agricultural Economics 2004;86(5):1196-1202. |
R828627 (Final) |
Exit |
Supplemental Keywords:
collective enforcement, nonpoint source pollution, tradable pollution permits, watersheds, voluntary incentive programs, market mechanisms, abatement technology, collective enforcement agreements, empirical trading models, environmental compliance, environmental economics, farmers, land management practices, market incentives, nonpoint source pollution trading, pollution allowance trading, pollution fees, socioeconomics, tradable pollution permits, voluntary compliance programs,, RFA, Scientific Discipline, Economic, Social, & Behavioral Science Research Program, Ecology, Chemistry, Economics, Market mechanisms, Social Science, farmers, market incentives, nonpoint source pollution trading, voluntary compliance programs, socioeconomics, environmental Compliance, empiracle trading models, land management practices, abatement technology, pollution fees, water quality, tradable pollution permits, pollution allowance trading, environmental economicsProgress and Final Reports:
Original AbstractThe perspectives, information and conclusions conveyed in research project abstracts, progress reports, final reports, journal abstracts and journal publications convey the viewpoints of the principal investigator and may not represent the views and policies of ORD and EPA. Conclusions drawn by the principal investigators have not been reviewed by the Agency.