Saving a creek one bid at a time: A uniform price auction for urban stormwater retention

Abstract

Urban stormwater runoff degrades waterway health. We describe a market-based approach to identify the most efficient investments to reduce urban stormwater impacts at minimum cost. The framework involves the joint consideration of public and private supply of environmental services across scales; a metric to compare the benefits of interventions across and within scales; an environmental procurement auction to reveal and minimise the cost of private interventions; and an endogenous reserve price to select the optimal portfolio of investments. The paper discusses the economic and environmental rationale for the proposed approach, along with the results of Stormwater Tender, a field trial in Melbourne, Australia. To conceptualize the optimal portfolio of investments we draw the aggregate supply curve and the production possibility frontier (PPF) using data from the field trial. We find considerable heterogeneity in both the private and public cost of providing environmental benefits, highlighting the need to consider interventions across a range of scales. We also find that existing theory is limited in its ability to predict bidders' behaviour. Despite this, it is evident that using the PPF to select projects considerably improves the cost effectiveness of the investment. We therefore conclude that the approach is an effective way of maximising the benefits of policy interventions to reduce the impacts of stormwater on urban waterways.

Keywords::

• market-based-instruments
• stormwater management
• auctions
• environmental policy

Notes

^1. A rain-garden is a vegetated soil-based filtration or infiltration system, where pollutants are removed as the water trickles through a prescribed filter media. See for example Bratières et al. (2008) for further details.

^2. The University of Melbourne in conjunction with Monash University secured a grant from the Victorian Water Trust and Melbourne Water to run an auction for stormwater retention in the study area, Little Stringybark Creek catchment. In addition to this funding, the auction made use of rebates provided by the Victorian Government for the installation of rainwater tanks. Melbourne Water also augmented the budget by paying successful households per unit of nitrogen reduction they provided as part of a pre-existing offset fund and Yarra Valley Water assisted by administering the distribution of grant funds to recipients. Stormwater Tender was carried out in 2008. In a subsequent year further funding was secured and Stormwater Fund, an ascending uniform price auction, began operating in the same area. The design and the results of this subsequent auction will be reported in a separate paper.

^3. Synergies could also potentially exist between neighbouring households or between households and other public works. In the current pilot however, these synergies were deemed too small relative to costs.

^4. There are several auction mechanisms that were considered. For example, an ascending price auction begins with announcing a low price, and requesting quantity bids from participants at that price. The price is then raised until either all the goods required are procured, or the budget is exhausted. In theory, the uniform price sealed bid and the ascending price auctions are analogous. Despite their theoretical equivalence, there is conflicting experimental evidence regarding the outcomes of the two different formats. While Stormwater Tender was run as a sealed bid uniform-price auction, Stormwater Fund (another project in the same area completed in 2011) was run as an ascending price auction.

^5. The second pilot, called Stormwater Fund, took place in the same area in 2010/11. The design of the auction adopted the same principles outlined in this paper. However, several features of the auction differed. For example it was thought that an ascending-price auction undertaken over an extended period of time would simplify the decision-making of households. Streetscape projects also directly competed for funding via proxy bids in this auction. The metric also adopted a more sophisticated consideration of synergies across the property-parcel and streetscape scales. For further information on the new generation metric see Walsh et al. (2010).